Kuantum Papers Limited (KUANTUM.NS) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Kuantum Papers Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Good afternoon, everyone, and a warm welcome to you all. My name is Purvangi Jain from Valorem Advisors. We represent the Investor Relations of Kuantum Papers Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the second quarter and first half of the financial year 2026. Before we begin, a quick cautionary statement. Some of the statements made in today's earnings conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decision. The purpose of today's conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Pavan Khaitan, Vice Chairman and Managing Director; Mr. Vikram Khaitan, Chief Financial Officer; and Ms. Prachi Sharma, VP, Corporate Strategy. Without any delay, I request Mr. Pavan Khaitan to give his opening remarks. Thank you, and over to you, sir.

Thank you, Purvangi. Good afternoon, everyone. It's a pleasure to welcome you all to our earnings conference call for the second quarter and first half of the financial year '25-'26. I would like to thank you all participants for joining us today. The paper industry continues to operate in a challenging environment characterized by elevated input costs particularly for wood and subdued realizations amid persistent inflow of low-priced imports. These pressures have impacted margins across the sector despite steady demand and improved sales volumes. The situation has been further compounded by recent changes in the GST rates with tax on paper and boards rising from 12% to 18%, while converted products such as mono cartons and corrugated boxes reduced to 5%. And in relation to our industry, the notebooks and paper for notebooks have been made nil-rated, resulting in an inverted duty structure. This has led to higher working capital requirements, blockage of input tax credits and increased vulnerability of domestic manufacturers to cheaper imports that are not subject to similar embedded taxes. The industry has represented this anomaly before the government and the GST Council for suitable corrective action. Also, the industry continues to actively engage with policymakers seeking suitable safeguard measures to curb the rapid influx of low-priced coated and uncoated paper imports into the country. Encouragingly, there are early signs of moderation in wood pricing with improving availability, those sustained policy support remains vital to restore profitability and stability across the value chain. On the operational front, I am pleased to share that following the upgradation of our Paper Machine 4, we have achieved our highest ever monthly production of 8,303 metric tonnes in September on this machine as well as the highest ever daily production of 360 tonnes in July 2025, a reflection of the enhanced efficiency and reliability of our upgraded system. We expect to further improve our production numbers on PM 4 as the machine stabilizes and runability improves. Under Project Nirmaan, our industry 4.0-led AI-based transformation, the initiative and the advanced process control baseline study for PM 4 was successfully completed during the quarter. In terms of product innovation, our team has developed a new grade copper premium 3, which is a cream-based paper on Paper Machine 3, which serves as a base paper for coating applications, further strengthening our product portfolio in the specialty range. We have made significant progress on our mill expansion and upgradation project, the Double Displacement System, DDS for our wood pulp mill is advancing well and once commissioned, will enhance the quality and yield of our wood pulp while delivering operational cost savings. The installation of 2 multi-grade filters, MGFs for surface water filtration has been completed, which will improve the quality of input water used in our production. Further, we are proud to have successfully executed European Union Deforestation Regulation, EUDR and Forest Stewardship Council, FSC compliant orders in Q2, reinforcing our strong commitment to responsible sourcing, combating deforestation and promoting sustainable management of natural resources. We achieved our highest ever quarterly distribution of 18.21 lakh clonal saplings under the social farm forestry program, taking the total number of beneficiary farmers to 17,343. This initiative not only strengthens our raw material sustainability but also continues to create a meaningful socioeconomic impact in rural communities. With that, I would now like to invite our CFO, Mr. Vikram Khaitan to share the financial highlights for the quarter and half year. Over to you.

Thank you, sir, and good afternoon, everyone. For the quarter under review, our operational income stood at INR 280 crores, reflecting a sequential growth of 25.5%. This increase of INR 57 crores over the previous quarter was primarily driven by higher paper production and sales following the successful upgradation of Paper Machine 4. Overall production during the quarter was higher by 3,500 tonnes as compared to the same period last year. The EBITDA for the quarter stood at INR 34 crores, with EBITDA margin at 12.3%, lower by 532 basis points on a quarter-to-quarter basis. The contraction in margin was mainly due to decline in net sales realization by INR 3,200 per tonne in line with the overall industry trend impacted by cheaper imports. In addition, production costs increased by around INR 1,300 per tonne, largely on account of higher agro and wood-based raw material prices due to the floods in the Punjab. Our PAT for the quarter stood at INR 6 crores, translating to PAT margins of 2.07%. For the first half of the financial year, operational income stood at INR 503 crores. EBITDA during the period was INR 75 crores, with EBITDA margin at 14.88%, while PAT stood at INR 18 crores with PAT margins of 3.54%. With this, we can now begin the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Madhur Rathi from Counter Investments.

Sir, I wanted to understand, with all the CapEx that we are doing on the paper machine expansion as well as towards our wood pulp and water processing machines. Sir, where do we see our EBITDA per tonne improving over the next 2 to 3 years?

In terms of value, obviously, it will increase because from our current 450 tonnes per day capacity -- paper-producing capacity, we intend to reach about 650 tonnes per day. So this increased production volume, which we do not see any problems in selling in the market, certainly will give us added both top line and bottom line. We see our EBITDA margins going up to, let's say, close to 18% to 20% under these challenging circumstances. And if the environment grows beneficial towards us with better realizations coming in, we could see a bump up in the EBITDA levels further.

Sir, what is the cost of production -- what is our current cost of production? And how much reduction is expected with the -- all the wood pulp machine, the water machine as well as expanded capacity?

So we are in the range of about between INR 50,000 and INR 55,000 per tonne on our cost of production, and this difference is due to the different grades of paper that we made. This is likely to see a reduction of between 7%, 8% going forward with increased efficiencies and the better yields on our pulp, better quality of pulp and also because of the 4.0 transformation AI-based initiatives that we are implementing in our operation.

Got it. Sir, you mentioned that our cost of products -- so we were hit by higher raw material costs during the quarter. So what is your current mix between the agro residue and wood pulp in our raw material? And sir, with the premium paper that we are going to manufacture going forward. What is the expected mix between wood and agri residue, we can expect maybe over the next 2 to 3 years?

Our current sort of engagement with fiber is about 50-50, 50% agro, 50% wood. That is going to remain very, very similar going forward, except for the fact that in certain grades, we can intentionally change this mix to suit the kind of quality that we want. But on an overall scale, if you see the monthly production figures, it will translate to 50-50, both on agro and wood. And going forward, we will see a reduction in our wood pulp pricing with our implementation of the DDS technology and which will give us better yields and better pulp quality and that will greatly benefit us in our operations.

Got it. Sir, so is it fair to assume that most of our expanded 650 metric tonne capacity will operate at optimum utilization in FY '27?

Yes, that is clearly the intention, and we are very confident that we will achieve that.

Okay. Sir, so is it fair to assume that we can expect a 30% to 40% volume growth next year?

Yes, we should be able to achieve that.

Got it. Sir, just a final question from my end. Sir, what is the peak cost of debt that is expected? What is the peak debt and the cost of debt that we currently have?

The peak debt, we are going to be in the range of between INR 600 crores and INR 650 crores. That's on the term loan. Working capital is very, very consistent at between INR 50 crores and INR 80 crores, which is a very, very low kind of working capital for our size and scale of business. And cost is in the range of 8.5% to 9%.

The next question is from the line of Arihant from Bowhead Investment Advisors.

Sir, I wanted to know, have we taken any price increase because of the inverted duty structure? Has there been any price increase or any change on that front in post after the GST?

No. Arihant, at the moment, there is no scope for any kind of price increase. And in fact, what is happening is that the government is pushing the entire industry to pass on the entire benefit of the GST reduction. So they are also sort of trying to monitor that we pass on this entire benefit to the customers. So it's going to be -- not going to be easy passing on an increase, even though there is going to be an impact of higher cost of input tax credit that we will need to reverse. So that is something that we are still debating on how we take impact of that and sort of take a call accordingly.

And sir, in respect of representation made to the government and GST Council, any rough idea by when you are expecting to hear from them or expect them to make changes?

Yes, we have been informed that in the very next GST Council, this revisit of this entire anomaly will be done. And as and how that GST council meeting happens, we are going to get a revert from the government.

The next question is from the line of Madhav Jhawar from SKP Securities.

I wanted to understand, sir after the changes of GST, how has been the sales? And what kind of trend do you see going ahead?

So we are trending very good on volumes going forward. It's just that the market landscape will need to change for us. We are taking a cautious call of not really promoting paper sales for notebooks. I'm sorry, I'm hearing a lot of disturbance in the background.

Mr. Madhav, I would request you to please mute yourself.

So all we are doing as a strategy is that we are concentrating on sectors which do not require us to push out paper for notebooks, therefore, preventing our sort of input tax credit reversal as well. And I think a big step in this direction will actually come when we upgrade our PM 3, which will happen by next year, we, in any case, will be offset by not needing to sell in the notebook segment because our paper qualities on that machine will be such, it will allow us to make more volumes of maplitho grades and enter an entirely different product segment.

The next question is from the line of Deepak Ajmera from IGE India.

My question is from the respect of that is -- latently import duty has been reduced from the paperboard purchase from the Southeast Asian companies, how do you see the impact of the same?

Well, fortunately, for us, Deepak, we are not in the paperboard segment at all. We are in the writing and printing segment and any impact on that is not really visible on us. But yes, the imports on notebooks has also reduced to 0%. That is somewhat impacting us. But as I suggested, we are altering our strategy and trying to come away from the notebook segment, and enter differential grades of paper, which are there in the maplitho and higher value-added segments.

How do you see the impact of the overall industry?

Yes, we are seeing a slight bit of impact in terms of increased import volumes in this current period as well as Q1. We have witnessed about 7% to 8% increased volumes coming into the country of imports. And in terms of metric tonne wise, it is close to about 1 million tonnes plus. So this is something which at the moment is affordable, and something that can be taken into the levels of competition by the industry, but only time will tell whether the government comes to the industry's rescue and puts in the necessary impediments to further increase in imports because that has happened, the MIP is in place for paper and paperboards and a minimum import price regime has come in. And the fact is that an MIP regime is under consideration by the government for the writing and printing paper segment as well now.

Okay. And the industry has been lately pushing for BIS. So how do you see progress of the same? And do you see it getting implemented then? What could be the potential impacts?

You are saying pushing BIS, which is a certification?

On import from Southeast Asian...

So that's what I said. The government is considering putting in place an MIP on imports, which is a minimum import pricing mechanism and which will certainly going to be helpful towards the industry.

The next question is from the line of Krushi Parekh from BugleRock PMS.

I just wanted to understand the reason for decline in the volume this quarter, is it purely related to the flood situation or something else as well?

I'm sorry. We have shown an increase in volumes. There is no decline in volumes whatsoever.

Okay. So I think -- sorry, just a moment.

While our CFO has made a statement, he suggested that there is an increase of 3,500 tonnes in this quarter compared to corresponding quarter.

Is it because of some reclassification that was undertaken? Because, I mean, from what I have been recording, 42 -- sorry, it's 3.5%. Yes. Sorry. So okay, my bad, apologies for that. What about realization, sir?

All this volume increase has clearly happened because of the upgradation that we have taken on our PM 4. It is helping us get in increased volumes of paper production, and that has helped us get these additional volumes in Q2.

Right, right. Wonderful. So no, so apologies, my mistake. I saw some wrong numbers on this. But apart from that, we continue to maintain that once the capacity comes on stream, we have largely a ready market for our products, and we should be able to sell. And this is despite the imports that we are witnessing that are increasing?

Yes. So largely, the increase in import volumes is happening in the notebook category or the paper for notebooks for which the government has given out 0% duty structure. And as I shared earlier, we are strategically trying to get away from that market for ourselves and enter into differential markets for which our products are very, very well placed to enter.

So currently, what percentage of our products would ultimately be resulting into notebooks?

We were selling about 20%, 22% of our production in notebooks. And that is also because two of our machines are making kind of paper which the notebook industry can take. Out of that Paper Machine 3, which is of a much higher capacity, that is also going in for an upgrade this year. At the end of the year, we will be upgrading that. And that machine today after upgradation will be able to make maplitho grades paper and will be helpful towards and allow us not to enter the notebook segment and enter an alternate higher value-added segment of maplitho paper.

Okay. Okay. And when it comes to the margin, we saw a major decline in the margin, of course, floods are one thing, but what do you assess how much of it is like behind us? And how much it will continue? And some portion, I believe, is still because of overall shortage in the raw material? So can you help us attribute where do we see the cost pressures easing? Or how can it sustain further?

So we have not seen any kind of reduction in availability of raw material per se. That has not been an issue that we faced even though there was a kind of a flooding situation in Punjab, which had its impact on the availability. But per se, for our purposes, we are not seeing nonavailability or a reduction in availability an issue at all. Pricing is a little bit of a challenge right now both from terms of input raw material pricing going a little bit higher. And at the moment, the paper pricing is more or less stable, but we will hope for and we do expect that the price will come up in Q3 and Q4, which, as trending suggests normally happens every year.

Okay. So what you are trying to suggest is that whatever increase in the raw material prices that we saw is largely here to stay for at least near term?

Yes. Yes.

Okay. So the margins that we saw is at least over near term, it's likely to stay like this?

I'm not saying margins are going to continue -- continue like this. As I said, paper pricing is likely to show an improved upward trend in Q3 and Q4, which historically trends have suggested happens. Q3 and Q4 are far better placed on paper pricing than Q1 and Q2. So that way, it will help increase our margins. And also with the kind of implementation of projects that we are doing on our machines and pulp mill, that should help reduce our cost of production, and that is going to help amend and increase our margins going forward.

Okay. But at least from the perspective of raw material, it is still likely to remain under pressure is basically you said?

Yes.

Okay. Okay. And we discussed some time back about industry making the representation with the government on having, first of all, this GST council is something which we just need to wait. But when it comes to minimum import prices on the products, which is impacting the industry. So what is -- what are the representations made by the industry in its own favor? Because I mean, ultimately, even government needs to have some incentives to make the -- those regulations. Like say, for example, in case of steel industry, timing, again, we have seen that in the interest of national interest because steel is a critical thing for India. Government has time and again protected them by having antidumping duties and all. So what is it that in favor of paper industry that we can motivate the government to make these things?

So the way that we have represented is that whatever are the consumption data that we, as a country, exhibit. The paper production in India is very, very there to take care of the entire consumption. So whatever imports are happening is primarily leading to an increased supply status. And that is helping coming in and impacting and disturbing the supply-demand ratio in the country. And that is impacting the industry performances quite dramatically as we are seeing and witnessing the industry margins have gradually reduced over the last 2, 3 quarters, and that is what we are sort of reminding the government that if this is allowed to continue then the industry is going to face a severe crunch in terms of maintaining margins and maintaining profitability.

Makes sense. And we -- I don't know, I mean, how you -- I mean, our company is also representing, but we may just want to point out to the 2012-'13 period when the industry was in great difficulty as well. So I think that is something that we may additionally want to highlight? So these are my questions.

[Operator Instructions] The next question is from the line of Manan Poladia from [ MKP ] Securities.

Congratulations on a good set. Sir, I have a couple of bookkeeping questions for you and then something else. So my first question is with regards to the Slide #8, I think, in our earnings presentation, where you've spoken about the EBITDA margin decline because of the NSR and the production cost. I was wondering if you could be able to put our NSR production costs for every quarter up in a graph on the PPT, so that I think it's a little bit more easier for us to understand what is driving the EBITDA margin. Would that be possible, sir? Like is that information that you can give out?

No, I don't think we are -- we will be able to do that because that is something which is very germane to our operations. And I don't think there is any kind of policy suggesting that companies declare and share these very detailed...

No, no, no, of course, there's no policy, sir, that's all right. Sir, my second question is with respect to the PM 3 upgradation. I was under the impression that the original plan was to do it quarter-by-quarter, like 1 machine per quarter. So have we delayed it to next year? Or how is that?